Construction Law Options Are Limited Can the Defense Turn

By Bennett J. Hansen to Contract? and Alexander S. Wylie

Oregon Supreme In Oregon’s ongoing construction defect wars, plaintiffs Court recognizes appear to have won the battle over the economic loss negligent construction doctrine. The tort of negligent construction is all but by declining to confirmed by the Oregon Supreme Court.Harris v. Suniga, 344 Or. 301, 180 P.3d 12 (2008). losses are those in which one participant in apply economic After the Oregon Supreme Court’s Harris the relationship agrees to act for the benefit decision, the main question is, can Oregon of the other, rather than at arm’s length. Id. loss doctrine. construction professionals limit their lia- at 161–62. Examples of special relationships bility through contract? include the attorney-client, agent-principal, and some insurer-insured relationships. Oregon’s Economic Loss While the economic loss doctrine has Doctrine Saga Closes been applied in Oregon for decades, it only Under Oregon’s long-standing version of the recently became significant to construction economic loss doctrine a plaintiff may not defect litigants. In July 2003, the Oregon recover in tort for purely economic losses Court of Appeals upheld a trial court dis- unless the plaintiff and defendant have a missal of tort claims in favor of a construc- special relationship. Economic losses are tion contractor in Jones v. Emerald Pacific broadly defined in Oregon as “financial Homes, Inc. Jones v. Emerald Pacific Homes, losses such as indebtedness incurred and Inc., 188 Or. App. 471, 71 P.3d 574 (2003). return of monies paid, as distinguished The Jones plaintiffs were homeowners from damages for injury to person or prop- who signed a custom-home construction erty.” Onita Pacific Corp., 315 Or. 149, 159, contract with their builder, Emerald Pacific 843 P.2d 890 (1992). Economic losses can Homes (Emerald). The homeowners then include lost profits, lost insurance proceeds, “became dissatisfied with Emerald’s alleged economic expectancy damages, investment failure to meet its schedule and with the al- losses, or money paid in settlement of per- legedly poor workmanship… in particular sonal injury claims. The kinds of relation- a leaky roof that caused damage to the in- ships that qualify for recovery of economic terior finish.”Id. at 473–74. The plaintiffs

n Bennett J. Hansen is a partner with Preg, O’Donnell & Gillett. His litigation practice concentrates on defending clients involved in construction injury, contract disputes and defects claims, as well as automo- bile and trucking accidents. He has defended clients in trial and arbitration, and is a graduate of the National Institute of Trial Advocacy. Alexander S. Wylie is an attorney in Preg O’Donnell & Gillett’s Portland office. His practice focuses on civil litigation.

© 2008 DRI. All rights reserved. For The Defense n August 2008 n 47 Construction Law sued in contract and in tort, but the trial missed altogether based on the economic the contract, then, and even though the court and court of appeals found that be- loss doctrine, while many others likely relationship between the parties arises cause the homeowner-builder relationship accepted discounted settlements to avoid out of the contract, the injured party may was not special, the homeowners could not the risk of a similar fate. bring a claim for negligence if the other maintain a tort claim against Emerald. In 2006, the Oregon Court of Appeals party is subject to a standard of care in- Following Jones, contractors, insurers, accepted the opportunity to clear up the dependent of the terms of the contract. and defense counsel thought they might fi- dispute over the interpretation of Jones, and Georgetown Realty v. The Home Ins. Co., 313 nally have the case law support to win the the court did so in favor of the application Or. 97, 106, 831 P.2d 7 (1992). debate over whether the economic loss rule of tort in construction defect actions in the Oregon courts determine whether the case of Harris v. Suniga. Harris v. Suniga, parties are subject to a standard of care 209 Or. App. 410, 149 P.3d 224 (2006). In independent of the terms of the contract reversing the trial court’s tort claims dis- by examining the dynamics of the relation- In Harris the court of appeals missal under the economic loss doctrine, ship at issue. The Oregon Court of Appeals the court of appeals highlighted two prob- characterized this analysis as a two-step indicated that it was mere lems with applying Jones to Harris-like sit- process: uations. First, the court decided that Jones Thus, to bring a tort claim based on con- coincidence that Jones was not an economic loss doctrine case at duct that is also breach of a contract, a all. Second, it decided that construction plaintiff must allege, first, that the defen- involved construction defects. defect damages, such as dry rot, are not dant’s conduct violated some standard pure economic loss damages, but are, in of care that is not part of the defen- fact, “property” damage. dant’s explicit or implied contractual trumps tort claims in Oregon construc- As explained by the court of appeals, the obligations; and, second, that the inde- tion defect cases. But after Jones, two prob- issue in Jones was not economic loss dam- pendent standard of care stems from a lems arose, which were brought to the trial ages, but rather whether a breach of con- particular special relationship between court judge’s attention by plaintiffs’ lawyers. tract could give rise to a separate tort claim the parties. First, and notable for a seminal economic for identical injuries. The Harris plain- Strader v. Grange Mutual Ins. Co., 179 Or. loss case, the Jones court never mentioned tiffs did not have a contract with the de- App. 329, 333, 39 P.3d 903 (2002). the words “economic loss” in the opinion. fendant builders in their case; they were Construction defect cases in Oregon Second, plaintiffs’ counsel relied on an old remote purchasers. Moreover, the court of routinely involve issues of contract inter- Oregon Supreme Court case with some trou- appeals agreed with the plaintiffs that New- pretation. And because the special rela- blesome language, Newman v. Tualatin De- man’s facts were materially indistinguish- tionship analysis is relevant to evaluating velopment Co. Newman v. Tualatin Dev. Co., able from the facts in Harris, and therefore, dual tort/contract claims (as in Jones and 287 Or. 47, 597 P.2d 800 (1979). The New- Newman controlled. Strader), as well as the economic loss doc- man court relied on out-of-state cases in In Harris the court of appeals indicated trine, it is easy to see how the standards concluding that “we know of no reason” that it was mere coincidence that Jones could become intertwined. Moreover, the why the plaintiffs could not maintain a neg- involved construction defects. Instead, dual tort/contract claim rule lacks a dis- ligence claim for construction defects. according to the court, Jones represented tinguishing standard appellation like “eco- To counter these arguments, defense the application of a different long-standing nomic loss doctrine.” counsel pointed out that the Jones court rule of Oregon law, which, as with the eco- In March 2008, the Oregon Supreme relied on economic loss cases, and, as in nomic loss doctrine, also requires a spe- Court affirmed the court of appeals’ deci- those economic loss cases, the court had cial relationship, and the modern lineage sion in Harris, largely reiterating the lower focused on the lack of a special relationship of which is traced through Oregon’s eco- court’s analysis. Both courts began their between the parties. Therefore, the argu- nomic loss doctrine cases. See, e.g., Ore-Ida discussions with overarching statements ment went, Jones must have been an eco- Foods v. Indian Head, 290 Or. 909, 627 P.2d regarding Oregon’s negligence standard. nomic loss case. Moreover, it was argued 469 (1981); Conway v. Pacific University, 324 Since the 1987 Oregon Supreme Court case that Jones simply signaled that Oregon Or. 231, 924 P.2d 88 (1996). Fazzolari v. Portland School Dist. No. 1J, would follow its neighbor Washington The actual rule applied in Jones holds Oregon has favored a “foreseeability analy- State in outlawing “negligent construc- that, under Oregon law, parties to a con- sis” over a more traditional duty and breach tion” based on the economic loss doctrine. tract can maintain breach of contract and of duty analysis in negligence cases. Fazzo- Atherton Condominium Apartment-­Owners tort claims for the same wrongful acts in lari v. Portland School Dist. No. 1J, 303 Or. Ass’n v. Blume Dev. Co., 115 Wash. 2d 506, limited circumstances: 1, 734 P.2d 1326 (1987). “We begin with the 799 P.2d 250 (1990). When the relationship involved is be- general rule that all persons are liable in For three and a half years, Oregon state tween contracting parties, and the gra- negligence if their conduct unreasonably and federal trial courts attempted to rec- vamen of the complaint is that one party creates a foreseeable risk of harm to oth- oncile Jones and Newman with variable caused damage to the other by negli- ers.” Harris v. Suniga, 209 Or. App. 410, 415, results. Some plaintiffs had their cases dis- gently performing its obligations under 149 P.3d 224 (2006).

48 n For The Defense n August 2008 While affirming the prominence of the ment. The terms of the limited warranty independent duty for parties to construc- foreseeability standard for negligence, the may amount to a blanket one-year labor and tion contracts is also probably incorrect. In Oregon Supreme Court in Harris also blew materials guarantee and include an option addition to Harris’ affirmation ofNewman , the last bit of dust off the Newman case. The to purchase an additional limited warranty Oregon has long held that an obligation to tort of negligent construction was born, for major systems extending over the dura- perform construction work in a workman- and construction defect damages are now tion of the statute of ultimate repose, or for like manner is an implied term of every defined as property damage rather than up to 10 years. ORS 12.135. As part of the construction contract. Beveridge v. King, pure economic loss in Oregon. contract and limited warranty, however, the 50 Or. App. 585, 587, 623 P.2d 1132 (1981) At the end of the Oregon Supreme Court’s builder can limit its exposure by disclaim- (citing Newlee v. Heyting, 167 Or. 288, 117 Harris opinion, the court referenced a sig- ing other express or implied warranties, as P.2d 829 (1941)). The duty to perform the nificant issue for defendants arguing in well as tort liability. An important question contract in a workmanlike manner is no favor of the economic loss doctrine: for builders and homeowners after Harris is different from a builder’s general obliga- Several amici aligned with defendants ar- whether the terms of these commonly used tion to exercise care in construction work gue that, because the original purchaser contracts, if enforceable in other respects, in a manner reasonably foreseeable to avoid could bring only a contract, and not a are still valid. damage to others; both obligations are negligence, action against the builder, Some construction defect plaintiffs with objective standards based on the accepted to allow plaintiffs to maintain a neg- contracts with contractors may argue that standards in the construction industry. ligence action here would lead to the after Harris, contractors must now specif- Furthermore, the court of appeals in anomalous result that a subsequent pur- ically disclaim tort liability in contracts to Harris clearly had the opportunity to over- chaser of the property would have “more” avoid exposure for negligent construction. turn Jones and did not. The supreme court rights against the builder than the per- Disclaimers of tort liability and waivers of did not even mention Jones in its Harris son for whom the builder constructed the warranties in consumer contracts must be opinion. The upshot is that a contractor’s building. They also assert, more gener- specific and conspicuous under Oregon obligation to perform work in a non-neg- ally, that a builder’s obligations and the law; attempted disclaimers of tort liability ligent manner existed under any construc- scope of its liability are better addressed and waivers of warranties in consumer con- tion contract long before Harris; Harris through contractual terms, rather than tracts regularly pose challenges to drafters simply confirmed a common law obliga- post hoc litigation… We decline to ad- and litigators. K-Lines, Inc. v. Roberts Motor tion which is not subject to the special rela- dress those issues. Certainly, contracts Co., 273 Or. 242, 541 P.2d 1378 (1975). If tionship limitations of the economic loss between builders and initial purchasers made in court, the argument that contrac- doctrine and which favors remote purchas- (and between initial purchasers and sub- tors must specifically disclaim tort liability ers. As long as a court clearly understands sequent purchasers) play a critical role in in contracts to avoid exposure for negligent that the gravamen of the plaintiff’s claim determining legal rights and liabilities, construction is probably unsound. Jones is is negligent performance of work under a and contractual negotiations are a pre- good law, and the court of appeals in Jones construction contract, Jones should bene- ferred method of establishing parties’ re- rendered its decision in favor of the con- fit defendants with contracts. spective obligations. This case, however, tractor without reference to disclaimers does not involve a contract, nor is it an or attempted waivers of liability. The best Contractors and Subsequent action by an initial purchaser against a interpretation of Jones after Harris is that Purchaser Claims after Harris builder, and the arguments the various the Jones court correctly recognized that Now more than ever, reducing contractor amici advance, while important and in- the contractual duty established between exposure in Oregon depends not only on teresting, simply go beyond what is at is- contract parties supplanted the common the strength of contracts with direct cus- sue here. law duty to build in a non-negligent man- tomers, but in finding ways to bind subse- Harris, 344 Or. at 313. With this dictum, ner. Furthermore, the contractual duty, quent purchasers to the original contract’s the court underlined the potential for dis- according to the Oregon Supreme Court, terms. Because Harris is new, clear strate- parate results for parties to construction has been around since Newman. gies for avoiding subsequent purchaser lia- defect actions when there is a contract Similarly, plaintiffs may argue that Har- bility for construction defect claims are between them. Clearly, defendants want to ris recognized a new independent duty to elusive. Short of a legislative remedy, build- be in Emerald’s position from Jones; plain- perform construction work in a non-neg- ers’ and contractors’ only recourse against tiffs will opt for Harris every time. ligent manner, and that the independent expanded subsequent purchaser claims duty falls outside the relationship terms of may lie in incorporating limitations on lia- Harris v. Suniga Should Not Invalidate the contract between the builder and pur- bility with the deed to real estate. Existing Construction Contracts chaser, creating a special relationship. If a As in many parts of the country, builders court agrees that an independent, concur- Can Limitations of Liability and contractors in Oregon commonly offer rent duty exists and the parties to the con- in Subsequent Purchases customers a limited warranty. For builders, tract have a special relationship, tort claims “Run with the Land”? the limited warranty is typically included as will survive. On the other hand, the notion If beneficial terms of an original purchase part of a standard purchase and sale agree- that Harris created or recognized a new and sale contract go, too, when title to real

For The Defense n August 2008 n 49 Construction Law property passes from the initial to subse- subsequent purchasers, the key terms sim- tenor of the deed, the nature of the thing quent purchaser, builders and contractors ilarly must be incorporated into the deed. to be done, its relation to the property, may not be able to avoid open-ended liabil- If valid terms are not properly incorporated the period of its continuance, and the ity. Therefore, they may seek to incorporate into the deed, an owner will argue that the like, that the parties intended that a cov- terms limiting liability to subsequent pur- contract terms were extinguished by the enant should run with the land, then in chasers into the deed in the same way as doctrine of merger. Valenti v. Hopkins, 324 order to carry out such intention the cov- more common covenants, conditions and Or. 324, 331, 936 P.2d 813 (1979). enant should ordinarily be construed restrictions. General statements from the Oregon as a real covenant, and therefore as one If, for example, a developer of a resi- Supreme Court regarding the interpreta- running with the land. dential subdivision institutes an architec- tion of covenants suggest that limitations Pearson v. Richards, 106 Or. 78, 211 P. 167 tural review committee and as part of a on a builder’s liability could run with the (1922). homeowners’ association, the restrictions land. For example, in the 1922 case of Pear- Although effectively incorporating limi- imposed on the property owner by the pro- son v. Richards, the court stated: tations on liability into a deed as a covenant cess will generally be enforceable as restric- When construing covenants in a deed, running with the land seems promising, it tive covenants, running with the land. For a courts ought, if possible, to ascertain is an unproven defense strategy, and thus builder to pass on limitations of liability in and give effect to the intention of the the construction fights in Oregon are likely the original purchase and sale agreement to parties, and if it appears from the whole to continue for the foreseeable future.

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